Sunday, January 28, 2024

From China to California: Be Careful What You Wish For

Note from Michael Salvatore, Editor, TradeSmith Daily: Just over one year ago, I had the great pleasure of meeting and working with Charles Sizemore.

Charles has been trading and writing about financial markets for his entire 20-plus year career, and that tenure shines through with every word he puts to paper. His guidance is pragmatic, useful, and on top of all that, endlessly entertaining. No wonder he's been a repeat guest on Fox Business, quoted in Barron's Magazine, and published in dozens of reputed financial publications.

I mention Charles because he recently launched an exciting project called The Freeport Society. And it embodies the side of Charles that, until now, most only got to know from meeting him personally.

The Freeport Society is a growing alliance of free thinkers and truthsayers, all committed to the ideals of free markets, free speech, and free minds that made America the greatest country on earth. They're evaluating the trends shaping our world from a refreshingly practical point of view and sharing their best investment ideas with their readers.

Under Charles' leadership, The Freeport Society has gotten off to a banging start since it launched, and I've been enjoying everything they've put out thus far.

Today, with permission from Charles and his team, I'm sharing a piece that really stuck out to me — about the intersection of inflation, automation, productivity, and government overreach that's impacting us here at home just as much as abroad.

To access all of Charles' essays and investment ideas in his free newsletter, The Freeport Navigator, just click here. When you do, you'll get his free report, "5 Unapologetically Profitable Stocks for 2024."

From China to California: Be Careful What You Wish For

By Charles Sizemore, Chief Investment Strategist, The Freeport Society

There's a problem with demanding higher wages at the proverbial point of a gun. It generally backfires because companies push those increased costs back onto consumers… the very people fighting for more money.

"OK! Here's your pay increase. But now you must also pay $10,000 more for that new car."

I get it. Every working stiff deserves to earn a living wage. But that always comes at a cost. There is no free lunch.

The increases and benefits the auto workers' union won last year won't seem like much at the end of this year, and we'll be back to seeing picket lines and stalemates on the news. Except it will likely be with fewer workers because General Motors and Ford will have already replaced a good swath of them with industrial robots.

The same is true for the insane minimum wage increase California Governor Gavin Newsom recently enacted, raising the hourly rate from $16 to $20. $4 extra an hour doesn't sound like much, but it's a 25% increase, and every Californian — and eventually, every American — will feel the fallout of that decision.

That's why I delved into this situation in granular detail in the brand-new January issue of The Freeport Investor. I also revealed the best investment opportunity right now that could help investors counter the effects of this insanity. Watch this special presentation for information on how to read this edition ASAP.

There's another outcome of this blind push for higher wages…

A Shrinking Workforce

In 1980, facing widespread poverty and wanting to steer limited resources away from child-rearing toward industrialization, China's mandarins took the extraordinary measure of limiting family size by government mandate. Thus was born the country's infamous one-child policy.

It worked…a little too well.

In the 20 years leading up to this fateful decision, the country's population grew by 47%. In the 20 years following the implementation of the one-child policy, population growth slowed to about 28%. Between 2000 and 2020, population growth was less than 12%. This chart shows China's growth curve. i

Since 2021, China's population has been falling.

In another few years, the trap door opens and it will plummet. China's population is projected to fall by more than 100 million over the next 21 years… and by more than 600 million by 2100.

Of course, population is not just a matter of body count. The age of said population is critical. A 60-year-old a few years away from retirement is very different from a 21-year-old just starting their career.

On this score, things look equally terrifying for the red dragon.

Currently, around 20% of China's population is over 60. By 2050, that number is projected to be almost 40%. By 2100, it will be just shy of half.

Imagine a world in which half the population is 60 or older, just years away from traditional retirement age.

How exactly is that going to work?

How does a society function with that many workers in or near retirement?

Who punches the time clock?

Who pays the taxes to keep the dog-and-pony show running?

The math doesn't work, which is why China's leaders are panicking again… and pushing Chinese women to have more children.

Too Little, Too Late

First, the one-child policy officially became the two-child policy in 2016… then, the three-child policy in 2021. Now, President Xi Jinping says that he wants to "actively cultivate a new culture of marriage and childbearing and strengthen guidance on young people's view on marriage, childbirth, and family."

Good luck with that.

I understand that Xi is, at least nominally, a communist. So perhaps he needs an economics lesson. After four decades of limiting urban families to just one child, the cost of living and the entire societal infrastructure adjusted to that reality.

Houses and apartments are built to accommodate a three-person family. If a Chinese family had five children tomorrow, where would they put them?

Education and child-care costs are priced assuming one child and two working parents. If a woman decided to comply and have five children, she'd probably have to quit paid work… or at least reduce her hours, meaning vastly higher expenses and a much smaller family income to pay for it all.

"Don't worry," the Chinese government says. "We'll give you these shiny tax rebates and even cash allowances for additional children."

Great!

But consider your own tax return here in America. Did tax cuts ever, at any point in time, convince you to have another kid?

I have three children, and sure, the child tax credit I used to get for each was a nice bonus. But it had no impact on my decision to have additional children. The couple thousand bucks was a meaningless drop in the bucket compared to the overall cost of raising a kid.

It won't work in China any more than it works here.

That means China is screwed. Utterly, irreparably screwed.

The Only Viable Solution Left to Companies the World Over

China's not alone here, of course. I made similar comments about South Korea earlier this month, noting that the country's plunging birth rate puts into question its ability to field an army in another couple of decades.

And while America's diminishing working population is a result of greed rather than demographic problems, the effects will be the same.

Now, there are demographic problems you can solve… and ones you can't.

You can't solve the consumption problem. A shrinking population with fewer people swiping credit cards is a problem for which there is simply no solution.

But the production problem — replacing a dearth of workers due to a shrinking, aging, or greedy society — is absolutely solvable.

Technology has been replacing human workers with machines since the dawn of the Industrial Revolution. The exponential progress of artificial intelligence, robotics, and automation promises to kick that trend into overdrive. This is one of five trends we focus on in our paid service The Freeport Investor. Our good friend, Louis Navellier, explains more here.

If we had responsible leadership — hell, if we had any leadership at all — our government would be doing everything possibly to promote AI and automation as the solution to our growing worker shortage. Instead, we get asinine debates about whether AI chatbots are "too woke" or "too racist."

I don't see that changing any time soon, especially not with the likes of Gavin Newsom in charge in California and the pitiful collection of candidates running for president. But there's no stopping progress… or the irresponsibility, ineffectiveness, and stupidity of politicians. So while we rage against the storm, we also position ourselves to profit from it.

Meanwhile, the private sector has already seen the writing on the wall.

Just this week, The Wall Street Journal reported that General Motors Co. (GM) and Ford Motor Co. (F) are investing heavily in robotics to offset the costs of their expensive new deal with the United Auto Workers. And fast-food restaurants have been investing in kitchen automation to offset the cost of minimum-wage hikes and unionization in the sector.

I detail all this in the January edition of The Freeport Investor. If you're not yet reading it, watch here to find out why you should and how to sign up.

This is just the tip of the iceberg. And the tech leaders — and smart investors — stepping up to replace human labor will make out like bandits.

To life, liberty, and the pursuit of wealth,

Charles Sizemore
Chief Investment Strategist,
The Freeport Society

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Sunday, January 28, 2024